Southpark Estates Inc. v. Canada

Southpark Estates Inc. v. Canada Court (s) Database Federal Court of Appeal Decisions Date 2006-04-27 Neutral citation 2006 FCA 153 File numbers A-632-04, A-633-04, A-634-04, A-635-04 Notes Digest Decision Content Date: 20060427 Dockets: A-632-04 A-633-04 A-634-04 A-635-04 Citation: 2006 FCA 153 CORAM: DESJARDINS J.A. EVANS J.A. PELLETIER J.A. BETWEEN: SOUTHPARK ESTATES INC. S.A.M. (COLORADO) INC. VILLA BELIVEAU INC. VIRDEN KIN PLACE INC. Appellants and HER MAJESTY THE QUEEN Respondent Heard at Winnipeg, Manitoba, on February 13, 2006. Judgment delivered at Ottawa, Ontario, on April 27, 2006. REASONS FOR JUDGMENT BY: PELLETIER J.A. CONCURRED IN BY: DESJARDINS J.A. EVANS J.A. Date: 20060427 Dockets: A-632-04 A-633-04 A-634-04 A-635-04 Citation: 2006 FCA 153 CORAM: DESJARDINS J.A. EVANS J.A. PELLETIER J.A. BETWEEN: SOUTHPARK ESTATES INC. S.A.M. (COLORADO) INC. VILLA BELIVEAU INC. VIRDEN KIN PLACE INC. Appellants and HER MAJESTY THE QUEEN Respondent REASONS FOR JUDGMENT PELLETIER J.A. [1] This appeal concerns the fair market value of certain life lease complexes for purposes of the Excise Tax Act, R.S.C. 1985, c. E-15. When the developers of the complexes turned over the first residential unit to a tenant, they were required to pay GST on the fair market value of the entire complex. In each case, the developer declared that the fair market value was significantly lower than the cost of construction of the complex. The Minister assessed liability for GST on the basis that the fair market value of the complexes was the cost of construction, and the developers appealed. The Tax Court judge affirmed the Minister's assessment on the basis of the expert evidence which he chose to accept. The appellants now appeal from the decision of the Tax Court of Canada. [2] Each of the complexes in issue was the subject of a separate appeal. These four appeals were heard and decided together in the Tax Court. For the same reason, they were heard together in this Court. As a result, these reasons will apply to appeals No. A-632-04, A-633-04, A-634-04 and A-635-04. A copy of the reasons will be placed in files A-632-04, A-633-04, A-634-04 and A-635-04, together with the judgment appropriate to each appeal. [3] The four complexes were all built and occupied as life lease apartment complexes. A life lease complex is a residential complex in which the tenants are life tenants of their individual units. [4] Three of the complexes, Villa Beliveau Inc. (Villa Beliveau), S.A.M. (Colorado) Inc. (Colorado), and Southpark Estates Inc. (Southpark), are located in the city of Winnipeg, and the fourth, Virden Kin Place Inc. (Virden), is located in the town of Virden in western Manitoba. All were developed by philanthropic organizations to provide accommodation for senior citizens in their communities. [5] As a result of the imposition of rent controls, there has been no construction of new rental units in these communities; the prescribed rents are insufficient to allow a developer to recover his costs as well as an acceptable return on his investment. (See para. 42 of the Tax Court judge's reasons). [6] One of the consequences of this state of affairs is a shortage of suitable apartment housing for seniors who, by virtue of owning their own homes, are "equity rich, income poor". (See para. 42 of the Tax Court judge's reasons).As a result, the Province of Manitoba developed the life lease concept which permits developers, typically not-for-profit entities, to construct suitable housing using equity supplied by the tenants. The legislation requires the life tenant to pay an entrance fee which, though substantial, is significantly less than the amount which would be required to purchase an equivalent condominium. The life tenant receives a lease for life or fifty years, whichever is shorter, and upon the termination of the lease, receives a refund of the entrance fees. These entrance fees constitute the equity in the project; the balance of the funds are generally advanced by a lender on the security of a mortgage. The tenant's rent is his or her proportionate share of the costs of the complex, including financing charges, adjusted to reflect the amount of the tenant's entrance fees. The rules of each complex determine whether, and upon what conditions, a life tenant may dispose of his or her interest in a unit. [7] Colorado is a 45 unit complex which was constructed in 1997 at a cost of $5,552,771 (A.B., vol. II(d), at p. 1095). Upon occupancy, it self assessed its liability for GST with respect to its building on the basis of a fair market value of $2,740,000. The Minister reassessed Colorado on the basis of a fair market value of not less than $5,215,000 and assessed net tax of $365,000, which required Colorado to pay an additional $273,200 of GST. Villa Beliveau, a 33 unit complex, was constructed in 1998 at a cost of $3,566,919 (A.B., vol. II(e), at p. 1466). It reported the fair market value of its building to be $2,400,000. The Minister disagreed and reassessed on the basis that the fair market value of Villa Beliveau's building was not less than $3,995,327, which created an additional liability in respect of GST in the amount of $111, 672. [8] Southpark, which was constructed at a cost of $6,434,895 (A.B., vol. II(d), at p. 1279), reported the fair market value of its 58 unit building as $4,100,000. The Minister's position is that the fair market value of the complex is $6,630,000 and that Southpark's liability for GST is $464,100, some $171,100 than the GST liability reported by Southpark. [9] Finally, Virden constructed a 22 unit life lease complex at a cost of $2,071,593 whose value it reported to be $1,261,000. The Minister reassessed it on the basis that the fair market value of the complex was at least $2,032,612, which gave rise to a liability for GST in the amount of $142,282, an increase of $53,582. THE LEGISLATION [10] This appeal arises because of subsections 123(1) and 191(3) of the Excise Tax Act which provide as follows: 123.(1) In section 121, this Part and Schedules V to X, "fair market value" of property or a service supplied to a person means the fair market value of the property or service without reference to any tax excluded by section 154 from the consideration for the supply; ... 191. (3) For the purposes of this Part, where (a) the construction or substantial renovation of a multiple unit residential complex is substantially completed, (b) the builder of the complex (i) gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence, (i.1) gives possession of any residential unit in the complex to a particular person under an agreement for (A) the supply by way of sale of the building or part thereof forming part of the complex, and (B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, or (ii) where the builder is an individual, occupies any residential unit in the complex as a place of residence, and (c) the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy a residential unit in the complex as a place of residence after substantial completion of the construction or renovation, the builder shall be deemed (d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession of the unit is so given to the particular person or the unit is so occupied by the builder, a taxable supply by way of sale of the complex, and (e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times. 123. (1) Les définitions qui suivent s'appliquent à l'article 121, à la présente partie et aux annexes V à X. « juste valeur marchande » Juste valeur marchande d'un bien ou d'un service fourni à une personne, abstraction faite de la taxe exclue de la contrepartie de la fourniture en application de l'article 154. ... 191. (3) Pour l'application de la présente partie, lorsque les conditions suivantes sont réunies : a) la construction ou les rénovations majeures d'un immeuble d'habitation à logements multiples sont achevées en grande partie, b) le constructeur, selon le cas : (i) transfère à une personne, qui n'est pas l'acheteur en vertu du contrat de vente visant l'immeuble, la possession d'une habitation de celui-ci aux termes d'un bail, d'une licence ou d'un accord semblable conclu en vue de l'occupation de l'habitation à titre résidentiel, (i.1) transfère à une personne la possession d'une habitation de l'immeuble aux termes d'une convention prévoyant : (A) d'une part, la fourniture par vente de tout ou partie du bâtiment faisant partie de l'immeuble, (B) d'autre part, la fourniture par bail du fonds faisant partie de l'immeuble ou la fourniture d'un tel bail par cession, (ii) étant un particulier, occupe lui-même à titre résidentiel une habitation de l'immeuble, c) le constructeur, la personne ou un particulier locataire de celle-ci ou titulaire d'un permis de celle-ci est le premier à occuper à titre résidentiel une habitation de l'immeuble après que les travaux sont achevés en grande partie, le constructeur est réputé : d) avoir effectué et reçu, par vente, la fourniture taxable de l'immeuble le jour où les travaux sont achevés en grande partie ou, s'il est postérieur, le jour où la possession de l'habitation est transférée à la personne ou l'habitation est occupée par lui; e) avoir payé à titre d'acquéreur et perçu à titre de fournisseur, au dernier en date de ces jours, la taxe relative à la fourniture, calculée sur la juste valeur marchande de l'immeuble ce jour-là. THE EXPERTS' EVIDENCE [11] The Tax Court heard expert evidence from two appraisers, Messrs Steele and Pestl and an expert in property development, Mr. Rabb. [12] The appellants' appraiser was Mr. William Steele. He defined "highest and best use" as "the most profitable legal use to which a property can be put. Opinion of such use is based on the highest and most profitable continuous legal use to which a Property is capable of being used, or likely in demand, in the near future." (See para. 14 of the Tax Court judge's reasons.) [13] Mr. Steele considered a number of factors in coming to the conclusion that the two potential highest and best uses of the properties in question were as residential condominiums or as non-profit multiple family residential complexes for seniors, in other words, the existing use. Of these two, he concluded that use as residential condominiums was precluded by the costs associated with the conversion of the units to condominium units. The Tax Court judge summarized Mr. Steele's position on this issue as follows: ...On that basis, Steele concluded that the market value of the subject properties as condominiums, less conversion costs, buyout costs and profit to the owner, was substantially less than their market value as non-profit multiple family residential complexes for seniors. Therefore, in his opinion, the highest and best use of the subject properties was for non-profit multiple family residential complexes for seniors and more specifically "for rental purposes". [Paragraph 14.] [14] Of the three conventional approaches to establishing property values, Mr. Steele considered that the Income approach and the Cost approach were the most appropriate; given the absence of sufficient data to support the Comparison approach. To obtain an assessment of fair market value under the Income approach, one calculates the property's potential to earn a profit, and capitalizes that profit on the basis of the desired rate of return. Simply put, if a property generates a profit of $100,000 per year, an investor who wishes to earn a 10% return on his investment would be willing to pay $1,000,000 for the property. The Cost approach attempts to determine the value of the property by the cost of replacing it with new construction and accounting for the "new for old" factor by means of depreciation. The Comparison approach seeks to establish fair market value by comparing the subject property to other market transactions of similar properties subject to adjustment to reflect differences in circumstances. [15] Mr. Steele's view was that, in a rent-controlled market, the value of a multiple family residential complex, as determined by the Cost approach, had to account for "economic obsolescence" which he described as a form of depreciation resulting in loss of value "caused by extrinsic conditions inherent to the subject property such as deficient location, excessive taxes, special assessments, government regulations, legislation or encroachment of inharmonious land uses." (paragraph 15 of the Tax Court judge's reasons). In the case of rent controls, his view was that economic obsolescence was measured by the capitalized value of the annual net income loss attributable to rent controls, that is, the difference between putative market rents sufficient to allow a developer to obtain a reasonable return on the capital invested in the building and the prescribed rents. [16] Using the Cost approach, and after accounting for economic obsolescence, Mr. Steele arrived at certain values with respect to the properties in question. He then approached the valuation of the complexes using the Income approach. In doing so, he utilized market rental rates. His results, using these two methods, as well as his final conclusions as to value are shown in the following table: Cost Income Final Colorado $3,000,000 $3,350,000 $3,300,000 Villa Beliveau $2,200,000 $2,150,000 $2,150,000 Southpark $3,800,000 $4,000,000 $4,000,000 Virden $1,150,000 $1,200,000 $1,200,000 [17] The appellants also tendered the evidence of Jeffrey Rabb, a property developer, specializing in the acquisition and redevelopment of multi-family rental properties. Mr. Rabb's evidence was that he had purchased and sold approximately 300 multi-family residential complexes. The Tax Court judge allowed him to give opinion evidence as to the market value of the four properties in question as rental properties, but declined to hear him on questions of appraisal methodology or the correctness of the conclusions of the two appraisers who testified. [18] Mr. Rabb's view was that the properties in question could not be economically converted to condominium units. He calculated their value as conventional multi-family residential apartment buildings using the income method, based on rental rates available in the Winnipeg market, and arrived at the following estimates of the amount an apartment developer would be prepared to pay for the properties: Colorado $3,028,449 Villa Beliveau $2,100,000 Southpark $3,678,980 [19] Mr. Rabb did not offer an opinion of the value of the Virden complex as a rental property. [20] The respondent relied upon the expert evidence of Mr. Pestl. He defined "fair market value" in the following way: For general purposes, market value may be defined as: - The probable price estimated in terms of money which the property would bring if exposed for sale in the open market by a willing seller allowing a reasonable time to find a willing buyer, neither buyer nor seller acting under compulsion, both having full knowledge of the uses and purposes to which the property is adapted and for which it is capable of being used, and both exercising reasonable judgement. [A.B., vol. II(e), at p. 1351.] [21] His view was that the highest and best use of the complexes was their existing use, that is as not-for-profit life lease complexes. The reasons for his conclusion are set out below: In order to determine the highest and best use of the subject property, we have investigated the zoning by-law, planning and other relevant data pertinent to the subject property. The existing improvements located on the lands comprise [particulars of each complex]. Based on these considerations, it is concluded the highest and best use of the property is a continuation of the existing use. [A.B., vol. II(e), at p. 1366.] [22] Mr. Pestl was of the view that the Income approach was not appropriate for these properties because their income streams were not at market rental rates. The life tenants' rent was determined by their entrance fees payments. In order to obtain an estimate of property value using the Income approach, it would be necessary to take into account both the monthly rentals and the entrance fee payments. His opinion of the value of the properties was based upon the Cost approach and the Comparison approach. In applying the Cost approach, Mr. Pestl took into account the actual development costs, as well as an estimate of development costs which he derived from a computer based program known as the Marshall Valuation Computer Costing system. A comparison of the two values led him to conclude that the actual development costs were the better indicator of the value of the property. [23] Mr. Pestl's application of the Comparison approach requires some explanation. The following is Mr. Pestl's description of the Direct Comparison approach: In the application of this approach, for both the determination of land value, and improved property value, the method requires the gathering of sales data (or listings, offers, leases, etc.) and identification and adjustment for differences between the sale properties and the subject, resulting in indications of value for the subject. These value indications are then reconciled to yield a value conclusion as to the most probable market value of the subject property. [A.B., vol. II(e), at p. 1387.] [24] Mr. Pestl began his Direct Comparison approach to the valuation of the complexes in issue with a comparison of the life lease units and condominium units. He posited two possible approaches to the sale of a life lease complex. The first involves the purchase of an existing complex by another life lease sponsor so that the sale is a sale of a complex. In the second approach, the life lease sponsor and the individual tenants could proceed with the sale of each of the individual units as condominium units. The sale of all of the units amounts to the sale of the complex. [25] Mr. Pestl chose the second approach. He researched the sale prices of all the units in 11 condominium developments in the Winnipegarea. He divided the sale price by the square footage of the condominium units of different sizes, and arrived at a range of value per square foot for each condominium development. Having identified two developments which he regarded as "the most reflective of the value of the subject complex." (A.B., vol. II(e), at p. 1403), he calculated the value of the subject complex as follows: The mid-range values of these comparables are $104.63, $124.48, $123.69 and $110.51 respectively, with an average of $115.83 per square foot. The subject property is considered to be of good quality construction and above average in features. However, having regard for the life lease nature of the project we conclude a value in the $116.00 to $120.00 per square foot range is appropriate for the subject project, and we therefore estimate a value of $118.00 per square foot, exclusive of GST. The subject property has a total unit area of 36,715 square feet, which at $118.00 per square foot indicates a total value of $4,332,370, which may be rounded to $4,332,000. [26] This example is taken from Mr. Pestl's appraisal of the Villa Beliveau project. He used the same data to arrive at the value of the other complexes in the Winnipeg area, though the choice of the most appropriate comparables varied in one case. In the case of the Virden complex, he examined condominium unit sales in condominium developments in surrounding communities to arrive at a base value per square foot which he multiplied by the square footage of the complex, in the same way as in the other complexes. [27] Mr. Pestl's results, using these two approaches are summarized below: Cost Comparison Colorado $5,355,000 $5,422,000 Villa Beliveau $4,350,000 $4,332,000 Southpark $6,457,000 $6,451,000 Virden $2,246,500 $2,065,000 [28] Mr. Pestl's conclusion as to the fair market value of the property is based upon his view of the most likely purchaser of the property: ...As it is anticipated that the most probable purchaser of the subject property would be another not-for-profit operator having the options as previously outlined, and considering the benefit of a significant time saving through the acquisition of an existing project it is further concluded that most weight would be placed on the Cost Approach considerations... [A.B., vol. II(e), at p. 1404.] [29] The limited options to which Mr. Pestl made reference were set out in an earlier passage: The definition of market value assumes a hypothetical market comprising of a willing seller and a willing buyer. In the subject Life Lease instance a typical willing buyer would likely be another not-for-profit type group wishing to provide similar residential accommodation to its members or community. Such a purchaser would have only two options available to it. The first is to acquire a site and build a new project, after appropriate commitments as to occupancies and Life Lease acquisitions etc., or second, to buy an existing newly completed complex, such as the subject, were it available for sale. Accordingly, the Cost Approach analysis is considered particularly relevant to the valuation of the subject property... [A.B., vol. II(e), at p. 1385.] [30] As a result, Mr. Pestl's final conclusion as to the value of the properties was the amount arrived by the Cost approach to valuation. THE TAX COURT'S DECISION [31] After a brief review of the concept of life leases, the Tax Court judge began his analysis by noting the issues on which the parties disagreed. The respondent's position was that the existing use as life lease complexes represented the highest and best use, while the appellants' view was that the highest and best use was apartment complexes. The next contentious issue was whether there was a separate market for these complexes. [32] The Tax Court judge did not explain what he meant by separate market. In his summary of the appellants' submissions, he notes the following: ...This assumption raises the question whether there was a separate market that would be willing and able to buy the properties in issue for their cost for the purpose of developing new life lease projects or whether these properties would end up on the normal market... [Supp. A.B., at p. 25.] [33] The respondent's position is that there exists a separate market for life lease complexes in which life lease sponsors would be prepared to purchase a fully constructed complex at its cost price. The appellants deny that there is such a market. [34] None of the experts gave evidence which would support the distinction between a normal market as opposed to a special market. On the other hand, there is a line of cases dealing with the concept of "special purchaser" which resembles a "special market." [35] As part of his examination of the special market, the Tax Court judge reviewed the evidence as to the demand for life lease residential units, and concluded that there was a demand for those units. He did not examine the nature of the demand, if any, for the complexes qua complexes. [36] The Tax Court judge then considered the respondent's allegation that the likely buyer of a life lease complex would be another not-for-profit life lease sponsor. The appellants challenged this thesis on the basis of four factors which they contended would either prevent or severely constrain a not-for-profit life lease sponsor from purchasing an existing project. Those factors are: a) the importance of the location of the project within a given community; b) the absence of any actual examples of such purchases; (c) the lengthy development time for life lease projects precludes the making of an offer on an existing structure within the time such a project might be expected to be on the market; and (d) the inability of a not-for-profit sponsor to purchase a building on its own due to its lack of financial resources. [37] The Tax Court judge considered each of these factors and concluded that the appellants' allegations were not well founded. He found that life lease projects were occupied by a diverse population and were not necessarily restricted to members of the sponsor group's target population. As for the absence of examples of transactions in which a life lease sponsor purchased an existing life lease complex, he concluded that this was because an appropriate project had never been put on the market. The Tax Court judge was of the view that the development time for a life lease project would be substantially reduced by the opportunity to purchase a completed project, given that many of the delays were due to the development of the building concept. This in turn would allow sponsors to attract potential tenants willing to pay their entrance fees within the time period that such a project might be expected to be on the market. [38] While the Tax Court judge did not explicitly state his conclusion, it is apparent that, at this point in his reasoning, he had satisfied himself that there was a separate market for life lease complexes, as he found that there was both demand and sponsor groups who were in a position to act to satisfy that demand. [39] The Tax Court judge then considered the issue of economic obsolescence, as put forward by Mr. Steele. In the end, he rejected this notion which led him to discard Mr. Steele's evidence as a whole. The Tax Court judge began his consideration of this issue by reviewing Mr. Steele's qualifications and his methods. He found that it was difficult to accept Mr. Steele's conclusions that the complexes were worth significantly less than their actual construction costs "given the fact that there was virtually no supporting data for his conclusion." (para. 52). The Tax Court judge then adopted Mr. Pestl's criticism of Mr. Steele's approach, namely that his analysis did not take into account the entrance fees paid by tenants in the determination of the rental rates for the units. The Tax Court judge also adopted Mr. Pestl's argument that by introducing the notion of economic obsolescence in the Cost approach to the determination of fair market value, Mr. Steele had blended what were intended to be two distinct approaches to valuation. To the extent that the concept of economic obsolescence was discredited, Mr. Steele's conclusions as to value based on both the Cost and Income approaches were undermined. In the end result, the Tax Court judge concluded that Mr. Steele's appraisals must be rejected. [40] Finally, the Tax Court judge addressed the appellants' argument that transactions involving life lease complexes were not market transactions because the life lease sponsors were not motivated by economic considerations but, by social and charitable objectives. The Tax Court judge rejected the appellants' submissions. On the strength of a passage which he cited from a handbook 'The Appraisal of Real Estate' (quoted at para. 33 of Moss v. The Queen, 99 DTC 1229), he concluded that entrepreneurial profit must be considered when the cost of construction is being considered, but that issue did not arise in these proceedings. Therefore, the absence of economic motivation would not make a sale of a life lease complex something other than a market transaction. [41] This chain of reasoning led the Tax Court judge to the following conclusions: The ultimate aim of the appraisal process is to determine the probable price which the property would bring if exposed on the open market. The evidence before the Court leads to the following conclusions: (i) the highest and best use of the properties in issue is a continuation of the existing use, i.e. a life lease senior citizen's multiple residence; (ii) there was a substantial market for life lease projects in Manitoba at the relevant time; (iii) the sale of a complex to another not-for-profit life lease sponsor would meet the definition of a fair market transaction; and (iv) the fair market values of the properties in issue are as determined by the Respondent's appraiser, Pestl. [Paragraph 56.] [42] In the end result, then, the Tax Court judge determined that the fair market value of the four complexes in question was their cost of construction. ISSUES [43] The appellants identify four issues on appeal: 1- Did the learned trial judge err in accepting Mr Pestl's assumption that there was a separate market of not-for-profit life lease developers unaffected by economic depreciation caused by rent controls? 2- Did the learned trial judge err in accepting Mr. Pestl's rejection of the Income approach to valuation? 3- Did the learned trial judge err in accepting Mr. Pestl's evidence that the value of a "complex" for the purposes of the Excise Tax Act is equal to the aggregate value of individual units without deduction of the costs of conversion, marketing and sale? 4- Did the learned trial judge err in refusing to admit the evidence of Mr. Rabb as to fair market value? ANALYSIS Standard of review [44] The standard of review applicable to determinations of fair market value was set out succinctly in Nash v. Canada, 2005 FCA 386, (2005), 344 N.R. 152, at paragraph 9: An appeal court will not interfere with findings of fact or inferences of fact by the trial judge absent palpable and overriding error (see Housen v. Nikolaisen, [2002] 2 S.C.R. 235 at paragraph 25). Fair market value has often been referred to as a question of fact. However, it is probably more accurate to say that fair market value is a determination of mixed fact and law. A determination of mixed fact and law involves applying a legal standard to a set of facts (see Housen at paragraph 26). In fair market value cases, the judge must apply the legally accepted definition of fair market value to the facts found from the evidence adduced before him. Normally, in a fair market value determination, the dominant component of the mixed question of fact and law is factual and the appeal is based on a dispute as to some aspect of the factual component of the determination. That is the case here. Therefore, the standard of review in this case will be the deferential standard, palpable and overriding error. That said, a conclusion for which there is no evidence amounts to a palpable and overriding error. Rich v. Canada (C.A.), 2003 FCA 38, [2003] 3 F.C. 493, at paragraph 26. [45] As noted in Nash, in most cases, the dominant issue in a question of mixed fact and law is factual, and the standard of review is therefore that which is appropriate to a question of fact. Where, however, there is an extricable question of law in a question of mixed fact and law, then the appropriate standard of review is that applicable to questions of law. See Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at paragraph 34 (Housen). In this context, that standard is correctness. DISCUSSION [46] The first issue raised by the appellants is the Tax Court judge's acceptance of Mr. Pestl's conclusion that the typical willing buyer was another life lease sponsor which entailed the further conclusion that there was a separate market for life lease properties among life lease sponsors. The trial judge's conclusion is based upon two prior conclusions. The first is that there is a market for life lease complexes. The second is that other life lease sponsors would be able and willing to buy a complex if it came on the market. [47] The appellants attack this conclusion on a number of grounds. They say that the evidence was to the effect that life lease sponsors, being not-for-profit entities, do not have the resources to purchase an existing complex. The evidence of two witnesses involved in life lease projects, Mr. Lyons and Mr. Leeies, was to the effect that because life lease projects require equity from the life tenants, a life lease sponsor could not purchase a complex until it had commitments from its prospective tenants, a process which take longer than the time the complex would be on the market. [48] The trial judge rejected this argument at paragraph 50 of his reasons. He concluded that the presence of a completed project would shorten the usual development time for such a project sufficiently to allow a sponsor to obtain the necessary commitments to proceed with a purchase. The appellants are simply asking us to substitute our assessment for the trial judge's, which we are not entitled to do. [49] The appellants challenge the notion of a separate market by arguing that Mr. Pestl's approach, which was adopted by the trial judge, was inconsistent with the definition of "complex" in the Act because it defined the complex by its means of financing (life lease) as opposed to its physical attributes. In other words, the appellants challenge the conclusion that the highest and best use of the complexes was a continuation of the existing use. They say, and it was admitted by Mr. Pestl, that the physical structure of the complexes was not determinative of their use. Each of these complexes was physically capable of being used for condominiums or for rental apartments. As a result, the appellants say that the complexes should have been valued as apartment buildings, based on the evidence of Mr. Rabb whose evidence it was that the complexes could not economically be converted to condominium units. [50] While the appellants may prefer Mr. Rabb's evidence to Mr. Pestl's, the trial judge did not. The appellants challenge the trial judge's conclusion on the issue of Mr. Rabb's qualifications as well, a matter which can usefully be disposed of at this point. The trial judge did accept Mr. Rabb's evidence insofar as it was limited to what the complexes would be worth as apartment blocks. That was a matter within Mr. Rabb's experience and expertise. However, Mr. Rabb was not an appraiser and did not hold himself out as an appraiser. The judge was right to decline to hear his evidence with respect to appraisal methodology. As for the judge's refusal to hear Mr. Rabb on the question of fair market value, that question requires a determination of the highest and best use. If the highest and best use was not as an apartment building, then Mr. Rabb's evidence could not establish fair market value. Consequently, the judge committed no error in his treatment of Mr. Rabb's evidence. [51] That said, the trial judge was entitled to accept Mr. Pestl's evidence as to the highest and best use to which the complexes could be put. Having accepted that the existing use represented the highest and best use, and that there were not-for-profit sponsors who were willing and able to purchase a life lease complex if one should come on the market, there was no basis for Mr. Rabb's valuation of the complexes as rental apartments. [52] The appellants challenge the finding of a separate market for life lease complexes on the ground that even if such a transaction were to occur, it would not constitute a market transaction, and would therefore not be determinative of fair market value. This argument is based upon the criteria by which Mr. Pestl qualified his definition of market value. According to the latter, in order for a transaction to represent market value, it must satisfy the following criteria, namely: - the parties must be typically motivated; - a reasonable time must be allowed for exposure on the open market; - the price must not be affected by special considerations such as creative financing or grants and concessions from other parties. [53] The appellants argued that none of these conditions was satisfied because the development of a life lease complex involved charitable motivation, it required an inordinate length of time, and all of the complexes benefited from some form of special treatment at the hands of municipal authorities. The trial judge disposed of this argument, largely on the issue of typical motivation. He cited an authoritative text on real estate appraisal which confirmed that entrepreneurial profit must be taken into account in the Cost approach to appraisal. The trial judge found that this was applicable to the determination of cost of construction which was not the issue in the case before him. He ultimately concluded that the absence of profit motive on the part of a potential purchaser would not take the transaction out of the domain of market transactions. [54] The trial judge's conclusion is a reasonable one and should not be disturbed. The appellants' entire argument on this point is misconceived. The criteria specified by Mr. Pestl apply to the sale transaction, not to the process by which the projects were constructed. If, in the negotiations leading to the sale, the vendor tried to obtain the highest price and the purchaser tried to pay the lowest price, then the parties were conventionally motivated; it was not necessary to go any further to dispose of this argument. [55] The second major issue raised by the appellants is the trial judge's acceptance of Mr. Pestl's position with respect to the Income approach to valuation. Mr. Pestl found that the Income approach was not appropriate in the valuation of the complexes because the rents were artificial, influenced as they were by the entrance fees. This argument is simply another aspect of the argument that the complexes should have been valued as apartment buildings, and their value determined by the capitalization of the income stream which they generated. The trial judge accepted Mr. Pestl's opinion that the entrance fees depressed rental rates and led to an artificially low valuation. [56] Given the fact that all of the life lease sponsors were not-for-profit organizations who had no incentive to set rates above the level required to service the mortgage and to pay necessary occupancy costs, it would be difficult to qualify the trial judge's conclusion as unreasonable. [57] The third major issue raised by the appellants was the trial judge's acceptance of Mr. Pestl's Comparable approach methodology in which a complex was valued as the sum of the value of the individual units without any allowance for condominium conversion costs and associated costs. The Comparable approach to valuation seeks to establish market value by comparing sales of comparable properties and making various adjustments to account for the differences between the subject property and the comparison properties. Because there have been no sales of life lease complexes as such, the Comparable approach could not be applied in the conventional way. Mr. Pestl, as noted earlier in these reasons, analogized from the sale of condominium units to derive a price per square foot which he then applied to the residential units in the various complexes. The fact that Mr. Pestl did not take conversion costs into account is of no consequence because he was not proposing that the units be sold as condominium units, simply that their value was analogous to that of condominium units. [58] That is sufficient to dispose of the arguments advanced by the appellants. Since they have the burden of demonstrating error on the part of the trial judge, and since they have not succeeded in identifying an error which would allow this Court to intervene, the appeal should be dismissed. However, I do not wish to be taken as having approved a questionable assumption underlying both appraisers' valuations. The basic issue confronting the Tax Court is the fair market value of the complexes. Both appraisers prepared valuation reports based on a valuation of the fee simple in the subject properties. An appraisal of the fee simple is, according to Mr. Pestl's report, one in which "all existing liens and encumbrances have been disregarded, and the property is appraised as though free and clear and under responsible management, unless otherwise stated." (A.B., vol. II(e), at p. 1347, emphasis in the original). No other limitations were stated in Mr. Pestl's report. The result was to ignore the presence and effect of the life leases held by the persons who were to occupy the suites. [59] The fact of ignoring the effect of the leases is not trivial. The following passage from Mr. Pestl's cross-examination illustrates the rights acquired by one who purchases the property subject to the life leases: ... I think the point I'm trying to make is that the nature of a disposition, any disposition of the subject project is contingent on -- what's being appraised is the fee simple value of the property... The fee simple interest is divided, in this instance, by the terms of the life lease, into two interests. The life lease interest is clearly a leasehold interest which is very, very substantial and the residual interest is the interest of the landlord, in this instance, the leased fee interest. And, essentially, absent the agreement of the life lease holder, the leased fee value is marginal because the leased fee -- the owner of the leased fee interest in the property has virtually no rights until such time as the leasehold interest is exhausted. And, as I indicated earlier, the life lease leasehold interest can -- well, first of all it's a very -- it doesn't have a definite term on conveyance, so it goes to the lease term based on the life of the purchaser, but even if that weren't to happen, the owner of the leased fee would only own the reversionary use of the property once the lease, in fact, is extinguished. And on extinguishing the lease, there is at least the payment of the entrance fee obligation back to the estate of the occupant and perhaps the payment of additional capital cost payments that were made, so there's a very small portion of the bundle of rights left for the owner of the leased fee interest. [A.B., vol. III(d), at pp. 784-85.] [My emphasis.] [60] The appraisers' decision to appraise the complexes on the basis of the fee simple, as opposed to the leased fee, was not questioned in these proceedings and as a result, we are not called upon to decide whether it was justified. Consequently, I express no opinion on that question and leave it to be decided in a case where it is argued. [61] In the end result, I would dismiss the appeals with one set of costs. "J.D. Denis Pelletier" J.A. "I concur Alice Desjardins J.A." "I agree John M. Evans J.A." FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKET: A-632-04 APPEAL FROM A JUDGMENT OF THE TAX COURT OF CANADA DATED NOVEMBER 1, 2004, DOCKET NUMBER 2000-1755 (GST)G, 2001-2725 (GST)G, 2001-2726(GST)G, 2001-2856(GST)G STYLE OF CAUSE: SOUTHPARK ESTATES INC., S.A.M. (COLORADO) INC. VILLA BELIVEAU INC., VIRDEN KIN PLACE INC. and HER MAJESTY THE QUEEN PLACE OF HEARING: Winnipeg, Manitoba DATE OF HEARING: February 13, 2006 REASONS FOR JUDGMENT BY: PELLETIER J.A. CONCURRED IN BY: DESJARDINS J.A. EVANS J.A. DATED: April 27, 2006 APPEARANCES: Mr. Jonathan Kroft Ms. Barbara Shields FOR THE APPELLANTS Mr. Lyle Bouvier FOR THE RESPONDENT SOLICITORS OF RECORD: Aikins, MacAulay & Thorvaldson LLP Winnipeg, Manitoba FOR THE APPELLANTS John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Ontario FOR THE RESPONDENT